November 20, 2018 Weekly Market Update
The term “Brexit” has worked its way back into the spotlight as the March 2019 deadline quickly approaches.
In June 2016, the United Kingdom (UK) held a referendum and voted to leave the European Union (EU). Over two years later, the event coined Brexit has been making headlines once again. On Wednesday it was announced that UK and EU negotiators had agreed on a draft withdrawal deal. However, the good news was short-lived as numerous members of UK Prime Minister Theresa May’s cabinet resigned in protest over the proposed agreement.
While Prime Minister May was able to secure approval from the cabinet, the sudden resignations ensure the deal will face plenty of resistance before becoming official. Next, a majority of Parliament has to approve the draft deal. This will be no easy task as May’s Conservative government does not hold a parliamentary majority and must rely on the support of other parties to get a deal passed.
In a statement to the country’s politicians in Parliament on Thursday, May said “The choice is clear, we can choose to leave with no deal, risk no Brexit at all or choose to unite and support the best deal that could be negotiated.” The UK is currently set to exit the EU in March 2019. While there is still the risk for no Brexit deal, most experts expect an agreement to ultimately be approved before the deadline.
The recent Brexit drama is just another example of the numerous geopolitical risks investors have faced throughout 2018. Short-term “newsworthy” events and trends can intensify market noise, making it difficult to focus on the fundamental drivers behind markets. This is why it is imperative for investors to have a plan they can stick to for the long-run. As investors we need to stay committed to our long-term financial goals. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can help reduce market noise and increase the odds of a successful outcome over time.
Chart of the week
Silicon Valley – home to many of the Nasdaq 100’s growth companies – has been hurting as of lately. Since August 1st, the Nasdaq composite has underperformed the S&P 500. High-growth tech stocks such as Facebook, Amazon, Netflix, and Google are mostly to blame as after years of uninterrupted growth, investors are growing weary of forward guidances. As we continue in the longest bull market run ever, investors are getting worried about when the next “crash” will happen. These fears have led to heightened volatility in the markets as investors sell and buy short-term news and lose sight of the longer-term fundamentals. Although recent sell-off has lowered valuations, making US stocks more fairly valued, investors are being cautious with high growth names as they fear their winning streak could come to an end.
*Chart source: Bloomberg
Broad equity markets finished the week negative as large-cap US stocks experienced the largest losses. S&P 500 sectors were mostly negative, with defensive sectors outperforming cyclical sectors.
So far in 2018 healthcare, technology, and consumer discretionary are the strongest performers while materials and communication services have been the worst performing sectors.
Commodities were negative as oil prices decreased by 6.20%. This is the sixth consecutive weekly loss for oil, resulting in an official bear market (drop of 20% from recent high levels). Many market speculators have been watching economic and technical data to gauge potential future direction from current suppressed levels. Investors had previously thought sanctions on Iran and OPEC production levels would not be sufficient for global demand. However, as events unfolded, the United States granted 6-month waivers to allow eight countries to temporarily import oil from Iran. Those eight countries happen to be Iran’s biggest customers. Additionally, as news that there won’t be a real supply gap from Iran emerged, US crude inventories came in at 5.8 million barrels – above analyst expectations of 1.6 million barrels. All these data points led to investors recognizing a possible oversupply in the market, pushed prices significantly lower. The upcoming weeks should provide more clarity on supply levels and where the price settles.
Gold prices rose by 1.19%, closing the week at $1220.80/oz. The metal jumped as the US dollar weakened on the back of future interest rate hike doubts. Two federal reserve officials cautioned global growth seems to be weakening, resulting in the dollar falling against a basket of foreign currencies. As the greenback weakens, gold (a US dollar-denominated metal) becomes cheaper for foreign investors. Additionally, as market volatility remains heightened, investors may find a temporary safe haven in the metal.
The 10-year Treasury yield fell from 3.19% to 3.08%, resulting in positive performance for traditional US bond asset classes. The decrease yields came as Fed Reserve official Richard Clarida said the Fed was getting close to reaching its neutral overnight rate. A neutral rate is one that accounts for inflation and is neither expansionary or contractionary. In the upcoming weeks, investors will be watching geopolitical and market events in order to gauge the need for safe haven treasuries.
High-yield bonds were negative for the week as riskier asset classes performed negatively and credit spreads loosened. However, as long as economic fundamentals remain healthy, higher-yielding bonds are expected to continue outperforming traditional bonds in the long-run as the risk of default is moderately low.
Asset class indices are mixed so far in 2018, with large-cap US stocks leading the way and international stocks lagging behind.
Lesson to be learned
In the short run, the market is a voting machine. In the long run, it is a weighing machine.”
– Benjamin Graham
Markets can behave like a popularity contest in the short-term as prices and trends can change quickly based on speculation and noise. However, in the long-term, market prices tend to reflect fundamentals. This is why having a concrete plan in place is so imperative. Sticking to a disciplined investment strategy can help take emotions out of the investment process and improve your chances for long-term success.
Our investment team has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 24.63, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 33.33% bullish – 33.33% neutral – 33.33% bearish. This means there is no clear direction of stock market movements for the near term (within the next 18 months).